Why the Windfall Tax is a bad idea30 Dec 2022 10:54
The expansion of the Energy Profits Levy in the last budget is a hugely damaging policy, not just to the UK North Sea Industry, but to the UK Govt finances in the longer term.
In particular, the fact that it is actually a tax on production and not profits is a nuance that is lost on many, but will have severe consequences in the near future.
Combined with the 30% Corporation Tax (yes, 30%, not 19%) and 10% Supplementary Charge already applied to North Sea production, it now means that every barrel of oil produced is now subject to 75% tax as soon as it leaves the ground.
Below I list ten reasons why the EPL needs to be re-examined (takes a couple of posts, so be patient!);
1. It deters investment.
Companies like fiscal stability as it allows them to plan years in advance with greater certainty. Investing in the UK North Sea is a risky business. It's mature and therefore lifting costs are higher, which makes exposure to price downturns much more perilous, as the large losses UK E&P companies filed during the pandemic demonstrate. To make that risk worthwhile the exposure to upside prices needs to be substantial. The EPL has removed this upside and has meant that the attractiveness of the UK oil & gas sector has been demolished.
2. Many E&P companies have limited upside price exposure.
Companies that took on large amounts of debt to invest in projects are usually forced to take large hedging positions to protect lenders from price downside. These positions typically are in place for three years, which cover 100% of the original EPL timeframe and 60% of the extended 2028 timeframe. This means that a large chunk of the ‘excess profit’ is funnelled to hedging contracts.
3. The UK is not Norway.
HM Government has pointed out that the marginal tax rate in Norway is 78% compared to 75% in the UK. This is not a valid comparison for a number of reasons. Norway is much less mature than the UK so field sizes are much bigger and profiles are often on or near plateau, when the UK basin was in this phase Petroleum Revenue Tax (PRT) was implemented creating a marginal rate of… 78%! The UK is now very mature; therefore margins are much thinner, making high tax rates much harder to bear. Secondly, Norway is extremely stable fiscally, the 78% tax rate has barely moved for many decades. The UK by comparison has a very complex and chaotic oil & gas fiscal history. This makes the risks associated with doing business in the UK much higher than Norway.
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